Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1987-88 - Whether commitment charges incurred in respect of debentures issued by assessee-company to acquire more working capital would be allowed as business expenditure - Held, yes - Whether where assessee incurred expenditure on repair and replacement for purpose of running of existing autoloom shed in more efficient manner and quantum of expenditure, when compared with gross block of assets, could not be termed to be very high, said expenditure would be allowed as business expenditure - Held, yes
Commissioner of Income-tax vs Mihir Textiles Ltd.
The assessee-company claimed deduction in respect of commitment charges and expenditure incurred on repair of existing plant and machinery. The Assessing Officer disallowed the first claim on the ground that the commitment charges were incurred for obtaining additional working capital and were in the nature of initial capital expenditure. He also disallowed the second claim on the ground that the expenditure incurred on repair of existing plant and machinery was not of routine nature but was of enduring nature and led to creation of new assets. On appeal, the Commissioner (Appeals) came to the conclusion that the commitment charges were incurred in respect of debentures issued by the assessee to acquire more working capital and were, thus, wholly and exclusively incurred for the purpose of business. In relation to the amount spent towards repair and replacement, he held that the expenditure was incurred for smooth and efficient running of the autoloom shed and, therefore, allowable as business expenditure. The order of the Commissioner (Appeals) was affirmed by the Tribunal.
On appeal by the revenue :
The Commissioner (Appeals) had recorded categorically that the commitment charges were payable in connection with the issue of debentures. The funds acquired by issuance of debentures were for the purposes of business. The commitment charges were payable under an agreement. The borrowing was to meet with needs of working capital. Therefore, the Commissioner (Appeals) concluded that the expenditure had been wholly and exclusively incurred for business of the assessee and was allowable as a deduction under section 36. [Para 7]
The aforesaid finding of the Commissioner (Appeals) had been confirmed by the Tribunal. Admittedly, the money borrowed by issuance of debentures was in the nature of loan and could not assume characteristics of an investment. In fact, the assessee was under a liability to return such borrowed funds upon maturity of debentures or earlier if the term of the debentures so provided. Therefore, the expenditure in the nature of commitment charges at the time of issuing such debentures would be on revenue account only, considering the fact that the expenditure had been incurred in an existing business. Even otherwise, the position of law is well-settled and expenditure, which is incurred even on capital account, would be allowable under section 36(1) as the said provision nowhere draws distinction between borrowings made on capital account and borrowings made on revenue account. [Para 8]
Therefore, in absence of any error of law and considering the concurrent findings of fact recorded by both, the Commissioner (Appeals) and the Tribunal, no interference was warranted in relation to the allowability of deduction of commitment charges. [Para 9]
So far as expenditure relating to repair and replacement was concerned, the appellate authorities had rightly examined the issue by appreciating as to whether the quantum of expenditure was substantial when compared to gross block of assets so as to suggest that there was a replacement of assets on capital account. It had been found on facts that the expenditure was not very high when compared to gross block of assets in light of the depreciation claimed and allowed during the year. [Para 11]
Hence, on the facts and circumstances of the case, it was not possible to say that any error of law had been committed by the Commissioner (Appeals) and the Tribunal. [Para 12]
Therefore, the Tribunal was right in law and on facts in confirming the order passed by the Commissioner (Appeals) directing the Assessing Officer to allow deduction in respect of repair and replacement expenditure.
It has to be borne in mind that once statutory appeals are provided in hierarchy where the appellate authority is superior to the assessing authority, the order of the assessing authority merges, on the issue contested, in the order of the appellate authority. The powers of the first appellate authority are co-extensive and co-terminus with that of the Assessing Officer and, hence, on facts, once the appellate authority finds that the facts recorded by the Assessing Officer are not correct, in the proposed questions, there should be no suggestion to the contrary. [Para 13]